What’s the Business Model for Massive Open Online Courses (MOOCs)? And What Does Online Education Strategically Mean for the Long-Run Rent Structure of Higher Education? Is this Truly Disruptive?

Melissa Korn and Jennifer Levitz ask a good question in a news article about so-called “Massive Open Online Courses” in today’s Wall Street Journal: what’s the business model? How do they generate revenues? There is a lot of discussion about how online education is going to shake up the cosseted business models of today’s brick and mortar universities, and MOOCs are often raised as a first wave of change. Coursera, Udacity, edX, and a few others have attracted significant investor support, as well as leading universities, seeking to be the first movers in the field. I don’t doubt that online education is going to significantly change university education, credentialing, cost structures of universities, and pedagogy. But the models – including the MOOC model for content delivery – are as yet untested and barely birthed. And a large question, of course, is how this is supposed to pay its way.

The most popular [MOOCs] enroll hundreds of thousands of students globally, and while they’re taught by star instructors from top universities, they generally don’t carry credit that can be applied to a college degree. While backers say the short, digestible lessons are nothing short of revolutionary, MOOC providers are still figuring out how to keep basic course access free while generating revenue.

One idea has been to match students with employers – a sort of job placement service. Udacity and Coursera, for example, have been experimenting with this, but haven’t seen much success so far. The Coursera model allowed online students to opt into a job placement service, where recruiters can “access details of their class performance.” But Coursera, according to the article, hasn’t finalized a fee structure and in any case only a handful of companies stuck their toes in the water.

What’s the problem? In the short run, the problem is the usual one of extracting nickels and dimes from massive numbers of online eyeballs, in a way that’s efficient and doesn’t scare away people who, in any case, assume everything on the internet is free. Maybe online ads, or any of the usual mechanisms for monetizing content on the web. Over the medium term, the draw presumably has to be not just education, but a credential that goes with it, reflecting a reputation in the wider community about the meaning of the credential – something for which someone will pay. Maybe that can be badges or certifications; all of this seeks to unbundle the university’s four year degree, as Glenn Reynolds has often noted.

Over the much longer term, the strategic question for the business plan is whether the new competitors intend to compete with the traditional university model or join it. Business strategy at this long term horizon has to take careful account of the sources of the traditional university’s rents. There are three (maybe more), at least when it comes to tuition paying undergraduates, particularly in the generalist and non-technical degrees of the liberal arts: “sorting” at the admissions office front end; the credential in the form of the bundled four-year degree; and actual education in the form of knowledge and skills.

The new online education companies, insofar as they look to this long-term horizon and think about competition with the traditional university model in a grand sense are grappling with the increasing gap between the credential and the education at universities as sources of rents. They seek to unbundle the two from each other – while also, however, unbundling the “internals” of both the credential and the education, exposing them course-by-course. Each online course seeks to show that its successful student has both the educational content imparted by the course, and seeks to provide a signal – a credential – that will be taken by employers as meaning something. Traditional universities see themselves as a quasi-monopoly on the provision of both credentials and education, and bundle all of it together under a single signal called a diploma.

But what about the front-end “sorting”? To start with, the monopoly aspect of the higher ed sector is leveraged by the fact that, in seeking reputation, students sort themselves into universities according to the best one that they can get into. For undergraduates at American University, say, it (or a relatively limited peer group of schools at its reputational level), they are at their “Harvard” – because Harvard wouldn’t have taken them. The impacts of this on the ability of the university to charge the same as Harvard are obvious. The efforts of MOOCs companies so far have been, at their most ambitious, to unbundle two of the three rent elements of the traditional university – to unbundle the four year degree credential in order to exploit the traditional university’s large and increasing gap between credential and actual educational content (at least in the liberal arts). Query whether they have given much thought to the third source of rents, the sorting function at the front-end. It might not matter if they don’t intend to compete – really compete – with the university system in any revolutionary, Schumpterian, way, but it likely matters a lot if they do.

So how do online providers seek to exploit the gap in the traditional university (in liberal arts, anyway) between credential and education? Essentially by closing it, and then showing that it’s closed on a “revealed” course-by-course basis. The promise of online education in the hands of the new providers is to make the credential not just cheaper in delivery – but actually meaningful in the sense of reconnecting the credential offered with the skills and knowledge gained, and then visible to the employer considering the student. At the end of the day, I don’t think that the universities will face serious competition simply from a cheaper provider – they can absorb the cheaper provider (or the cheaper provider as a business model) into the existing university structure. Their online competition will come from a cheaper provider which is also, and much more importantly, able to reunite credential and learning, and reveal that to the world in a reputationally meaningful and efficient way.

The new online competitors might address two of the traditional higher ed rent sources but not the third. This suggests an important lesson for the online entrepreneurs as they seek to compete with traditional higher education – which is not yet on the table, but coming – as they decide whether they can (or want to) engage in full-on head to head competition in the long run. There are technical fields in which the actual skills and content matter to employers, and MOOCs have often focused on those areas thus far, insofar as they are engaging in not just “enrichment” learning (Great Courses model), but contemplate launching into actual competition with higher ed. When it comes to liberal arts, however, the problems are not just the disconnect between credential-degree and what anyone actually learned in the way of knowledge and skills. It is also that the university serves to sort students in a very crude and basic way for their general brainpower – whatever that is supposed to mean beyond actual skills and knowledge. The basic assumption of the world beyond college is that liberal arts students don’t learn very much in college and anyway it’s pretty difficult to sort the smart ones from the less-smart ones on the basis of what they did at school, at least outside of technical fields. So you’re really left looking at the university’s reputation as an up-front sorter as a way of giving you an idea of the student’s general ability to learn and perform in the working world. Is there anything to this beyond standardized tests taken in high school? Well, there is a social aspect, the ability to work with others, and universities do spend time sorting the non-technically aimed students on those bases when they evaluate all the non-objective measures – however well or badly they do it.

I think the admissions process for getting into universities is one of the deep sources of dry rot in American society and its elites in particular. But the admissions office is a source of rents in the sense of who gets in and who doesn’t. The university can preserve the rents from that sorting function for a long time, even after the inadequacies of its actual educational content and pedagogy, along with the disconnect to its degree, are widely acknowledged. Not forever, perhaps. But since that sorting function is to a considerable extent a function of front-end admissions, not what happens at the university itself, and is perceived as a sorting function of general intelligence irrespective of actual skills in non-technical fields, then the university has a source of rents not available to the new online competitors. The new competitors, after all, don’t sort at the front end. For the traditional university, those sorting rents derive from the admissions office. So long as the admissions process is believed to perform a sorting function that signals value even apart from anything added by the university – even if the university’s educational value-added is functionally zero – then the traditional universities will have a continued competitive advantage over any other disruptive, head-to-head competitor, no matter how effective competitors are at re-uniting credential with actual educational content.

Maybe admissions sorting can’t last forever as a source of rents if new signaling mechanisms replace the old ones with regards to credential and education. But it might persist for a long time, and in the meantime, it might create irresistible pressures for these new content and pedagogical platforms not to compete, but be absorbed. Maybe the very long term strategy will turn out to be not revolutionary, disruptive competition, but instead integration of new ways for providing content and pedagogy into the university as a quasi-reform, quasi-accommodation. If that’s the future, those predicting that MOOCs and other things will sweep aside the existing quasi-monopolies should think hard, because these new content providers might find it easier to join the existing university platforms and perhaps hope to share the university rent-extraction monopoly rather than compete with it head-to-head.

In that case, the only true pressure on the traditional higher education model is simply unsustainable costs, which the university seeks to ameliorate by drawing into itself and absorbing the supposedly competitor technologies and content delivery of online education. It is thus unwise to assume, given the universities’ multiple sources of credentialing and sorting rents, that new models of pedagogical delivery will be disruptive competitors over the long term. Disruptive to the employment of professors – almost certainly, because you will need fewer of them as massive online courses displace duplicative professors at each school. But not necessarily disruptive to the institutional university rent structure. And not necessarily disruptive to the employment of university administrators, who don’t face replacement by online courses.

In fact, these new models might reinforce the existing structure of university rents, as the institutions capture much of the efficiency gains from the new models – and that, irrespective of whether they are pedagogically effective or not (which is not a settled question, we should note). Some possibilities: Fewer faculty; more administration as the brick and mortar of universities concentrates on non-academic university “services” to students; greater payouts to star faculty who win the coveted slots in the online courses and who function even more than elite university faculty do now as floating free agents without deep institutional commitments; more pressure on non-elite faculty to migrate upwards to the elite universities who provide the online stars, and hence more pressure on the “Red Queen” and “Glass Bead Game” activity of academic publishing and scholarship; etc.

I don’t know how any of this will turn out. I hold out hopes for meaningful and certainly, in that case, disruptive change to higher education. I’m with Glenn Reynolds and the message of his new book, The Higher Education Bubble, believing that the existing model is unsustainable economically and pedagogically not very good. He and I are both in the position of professors who are now parents of college students – and so, as someone remarked somewhere, deeply interested in the business model of the university as both producers and consumers. Contrary to what many people think, this is not reducible to some left-right divide; Matt Yglesias or someone with his politics remarked astutely that, at some point, liberals and the Democratic Party and the Obama administration would have to come to grips with the fact that what’s good for a liberal agenda is not coextensive with what’s good for university professors and administrators – hard as the Obama campaign’s professor-contribuors might find that to accept. But it also bears keeping in mind that new technological platforms such as online courses could easily reinforce existing models of the universities, and those in many of their worst ways.